Why what happens in the US matters for pension scheme members

US market dominance

Like it or not, what happens in the US stock market matters when it comes to people’s pension savings. The US is the world’s largest economy and is driven by many world-leading companies, and both can have an influence on share prices worldwide. 

In recent years, the influence of the US has been broadly positive, helped by the resilience of its economy, despite high levels of inflation and interest rates. Since the depths of the Covid-pandemic, US shares have generally done better than shares in other countries.  

Because of its strong performance, the US now accounts for a huge proportion of global shares – over 60% of some global stock market indices, including the FTSE All-World Index which captures a representation of large and medium-sized companies across the globe.¹

In contrast, Japan, the next-largest stock market, currently accounts for just 6%, and the UK, which is the third largest, amounts to less than 4% of global shares.  

Workplace pensions typically invest a significant amount in regional or global equities when members are some years away from their selected retirement date. And the US will usually be a big component.  

This means whatever happens in the US stock market, both directly and through the knock-on impact it can have on other markets, is a big influence on pension fund returns. 

So, what could influence the performance of the US stock market in the coming months? We’ve identified five things to look out for.

Remember, remember the 5th of November

It’s been a year of electioneering in many countries worldwide, including the UK. The likely outcome in the UK was well-flagged by polls in the run up to the vote. As such, we didn’t see much stock market volatility – or sharp movements up and down – around the result.  

In contrast, it’s a neck-and-neck race in the US at the moment, ahead of the presidential election on 5th November. Markets worldwide are closely monitoring the back and forth between candidates Kamala Harris and Donald Trump. The run up to, and aftermath of, November’s vote could see increased stock market volatility because of this.  

Discussion of possible policies on things like energy, climate change, migration and the economy could be among the influences on share prices. Possibly key for the eventual winner will be the make-up of the US Congress, where all seats in the House of Representatives are up for grabs, along with a third of the US Senate seats.  

Holding the majority in these two bodies can allow the winning candidate and their party to pass policies more easily, which may mean less uncertainty around policy updates and could make market moves less sharp.  

In our view, it’s not possible to predict market reactions with a high degree of certainty. While various studies have tried to show whether stock markets react best to Democrat or Republican wins, the results of these can vary depending on the timescales chosen for measuring the market moves.

Better or worse international relations?

The US election could also have ramifications for global relationships. For example, trade relationships with China, which have suffered over the past decade, will be monitored for further potential for tariffs and other trade barriers. The ongoing conflict between Russia and Ukraine, as well as trouble in the Middle East, could escalate or see steps towards resolution, making these key factors to keep a watchful eye on too.

A clear-cut interest rate policy?

After increasing interest rates to high levels to combat inflation, they’ve started to fall in many countries, including here in the UK.  

The US Federal Reserve (Fed), which is responsible for setting interest rates in the US, started cutting interest rates in September 2024, bringing them down by 0.5 percentage points. This reduction was possible because inflation had slowed and was back closer to the Fed’s target of 2%. US rates still remain at elevated levels compared with the past decade or so. 

The US rate cut was delayed compared with other developed markets because of the general robustness of the US economy, particularly the jobs market. The Fed may well want to monitor the effects of this initial interest rate cut on economic activity before making any sustained programme of reductions. However, the current consensus is that the Fed is likely to cut again in the near future. 

Over much of the past year there’s been some heavy stock market volatility around interest rate expectations, notably in August this year. This could continue if the policy direction isn’t clear or doesn’t align with investors’ views of the US economy.

An economic boost?

There have been signs in recent economic updates coming out of the US that the jobs market, in particular, has been coming off the boil. This has given the Fed some room to start cutting interest rates with less danger that this action could lead to rising inflation once more.  

The general hope is that rate cuts can bolster economic growth and improve consumer and business sentiment. However, the US will be doing well to sustain the momentum of recent years. US economic growth is currently predicted by one major body to slow from an expected 2.6% in 2024 to 1.9% in 2025.²

However, this would still be better than most other developed markets. Stock market investors will closely monitor things like jobs figures and economic growth data to see if the wait until September to cut interest rates has had a negative impact on growth, because rates remained too high for too long, or if it came in time to help support the economy and help sustain momentum.

The not-very-secret seven

It is no secret that much of the stock market strength in recent years has been attributable to a narrow group of large US technology companies – the so called ‘Magnificent 7’. These are Alphabet (formerly Google), Amazon, Apple, Meta (formerly Facebook), Microsoft, Nvidia and Tesla.  

The shares of these companies have dominated US stock markets in recent years. As their share prices have increased, it has led to a high degree of market concentration. This is when a small number of shares make up a big proportion of the market.  

These seven dwarf most other stocks in the US, and represented over 53% of the Nasdaq Composite Index, a measure of the largest US growth and technology shares.³ And nine of the top ten biggest companies in the world – six of which are in the Magnificent 7 – are from the US.¹

Much of their strong performance in the past two years has come from investor excitement around the potential for AI to change the way we live and work. Having business operations in this area has helped some companies’ shares to outperform.  

There have been some signs of these companies’ shares, and others in the technology or growth sectors, coming off the boil of late. This is perhaps because investors are having doubts about the degree to which the use of AI will be turned into sales and profits, or the timescales involved in achieving that. Technology stocks were among the biggest fallers in August’s stock market wobble.  

There is the potential for other shares that have been left behind to start performing better, for example, in the value sectors. However, it’s worth keeping an eye on interest rate movements as tech company shares typically tend to benefit from a lower rate environment. 

Conclusion

We will carefully monitor these issues and keep an eye on the risks and opportunities that could unfold. However, overall, with lots of big themes and issues potentially influencing share prices, we continue to believe in the importance of remaining in a well-diversified portfolio across geographies and asset classes.

References

1. FTSE Russell, FTSE All-World Index Factsheet, Data as at 30 August 2024 

2. International Monetary Fund. 2024. World Economic Outlook: Update--The Global Economy in a Sticky Spot. Washington, DC. July 2024 

3. Nasdaq, Nasdaq Composite Index Factsheet, Data as at 23 June 2024